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Ciab Makes Case For Less Insurance Regulation

The Council of Insurance of Insurance Agents and Brokers has just published a comprehensive study that makes a compelling case for less insurance regulation by detailing the costs and market dislocations of the present cumbersome system.

Without making specific recom-mendations, the study provides a well-researched analytical framework for policy makers to consider regulatory reform. "It is intended to focus the debate on insurance regulatory modernization and to serve as a resource to regulators, legislators, and industry leaders as regulatory debates continue," said Ken A. Crerar, CIAB President. The study was conducted for CIAB by Georgetown Economic Services, LLC, and independent consultant Adam K. Lee. Here are some of the findings:

Deregulation often is preferable to lesser reforms, even though the latter may constitute a necessary interim step.

An increasing proportion of insurance transactions is migrating beyond the reach and direct control of state regulators to alternative markets and other non-traditional risk-financing mechan-isms with little evidence of adverse ramifications.

The business environment is being transformed by financial services convergence and modernization, e-commerce, and globalization, all of which have accelerated and sharpened competitive forces. Under these conditions, the costs of regulation are magnified.

The tendency of insurance regulations to produce distortions and other unintended effects can generally be attributed to two fundamental causes - undermining of competitive market forces that generate incentives for loss control and interference with the normal relationship between premium levels and expected loss costs.

Geographical limitations within the state structure often require that regulatory determinations be made on a state-by-state basis. The fundamental question is whether such state-specific analysis is meaningful in an increasingly national and international market.

All the major reforms accomplished under the existing state structure have occurred only in response to major external threats of federal intervention or wholesale disloca-tions in the regulated markets. There is no assurance that the state-based system will enact meaningful further reforms absent a significant level of continuing threat and pressure.

In evaluating alternative regulatory structures, the industry is advised to give greater weight to alternatives that facilitate deregulation rather than those that facilitate specific changes in existing regulations.

Any alternative that reduces the number of potential jurisdictions (e.g., interstate compacts, mandatory or optional federal regulation in any form, or a financial services super-regulator) has the potential to achieve rapid or wholesale deregulation, as well as improvements in uniformity.

Restrictions on E & S lines can limit the ability of insureds to obtain the coverages they desire and are willing to purchase.

The study also pointed out the negative effects of rate and form regulation. "While constraining prices through price ceilings and discretionary approval may improve nominal affordability in the short-run, consumers do not benefit if, in response, insurers limit supply or withdraw from such markets entirely. Form regulation distorts the market by reducing the degree of product differentiation that would otherwise exist."

The broad deregulation being advocated for commercial lines was endorsed in the study as "the ideal approach" as opposed to incremental changes in particular regulations. Despite the compelling case made for regulatory reform, the study's authors are pessimistic about the outlook: "Unless galvanized by crisis, it is reasonable to expect that the greater the differentiation in regulatory goals and preferences across the industry, the less likely that Congress and the states will be willing to contemplate dramatic changes in structure."

Entitled "Costs and Benefits of Future Regulatory Options for the U.S. Insurance Industry," the study can be obtained for $95 per copy by calling CIAB (202-783-4400).